Cybersecurity: Stakeholder incentives,externalities, and policy options

Information security breaches are increasingly motivated by fraudulent and criminal motives. Reducing their considerable costs has become a pressing issue. Although cybersecurity has strong public good characteristics, most information security decisions are made by individual stakeholders. Due to the interconnectedness of cyberspace, these decentralized decisions are afflicted with externalities that can result in sub-optimal security levels. Devising effective solutions to this problem is complicated by the global nature of cyberspace, the interdependence of stakeholders, as well as the diversity and heterogeneity of players. The paper develops a framework for studying the co-evolution of the markets for cybercrime and cybersecurity. It examines the incentives of stakeholders to provide for security and their implications for the ICT ecosystem. The findings show that market and non-market relations in the information infrastructure generate many security-enhancing incentives. However, pervasive externalities remain that can only be corrected by voluntary or government-led collective measures.     

The New US Farm Bill: Lessons from a Complete Ideological Turnaround

The New US Farm Bill: Lessons from a Complete Ideological Turnaround The United States recently dopted a new farm law which represents a complete ideological turnaround from the 1996 FAIR Act. This turnaround is paradoxical when compared to the positions taken by the US government in international trade negotiations, particularly at the WTO. A political economy approach can be used to explain this paradox. For various reasons the US budget constraint was not very binding during the policy making process. This gave an opportunity to the supporters of various agricultural interest groups in Congress to forge a coalition in support of a “generous” farm bill which turned out to be politically very difficult to oppose in an election year. As a result it appears that the main economic concern behind the new law has been the instability of prices on international markets, little concern being expressed for the impact on trading partners. Consequently, the credibility of the US government in WTO agricultural trade negotiations will be damaged, but the very broad coalition pushing for liberalisation of agricultural policies in OECD countries will not be significantly weakened. The European Union, therefore, will find it very difficult to resist pressures for concessions on market access and the elimination of export subsidies. La nouvelle loi agricole aux Etats‐Unis: les leçons d'une volte‐face idéologique Les Etats‐Unis viennent d'adopter une nouvelle loi agricole qui marque un changement radical d'orientation par rapport à la loi passée en 1996. Ce revirement idéologique est paradoxal lorsqu'on le rapproche des positions prises par les représentants américains dans les négociations agricoles à l'OMC. Il peut cependant s'expliquer assez facilement si l'on adopte une perspective d‘économie politique. Pour des raisons diverses, la contrainte budgétaire ne s'est pas faite sentir trop fort durant la période d’élaboration de la loi, de sorte que les groupes de pression agricoles n'ont pas eu trop de mal à obtenir au congrès une coalition favorable à une législation “généreuse”à laquelle il eut été difficile de s'opposer en année électorate. En conséquence, le législateur américain a pu manifester son inquiétude vis‐à‐vis de l'instabilité des prix sur les marchés internationaux, et on peut se demander dans quelle mesure cela ne va pas ruiner la crédibilité des positions libérales prises par le gouvernement américain dans les négociations commerciales internationales. Cependant, il convient de noter que la coalition des pays membres qui ant intérêt à la libéralisation des politiques agricoles des pays riches est très large, et ne sera sans doute pas affaiblie de façon significative par cet événement. Il restera done très difficile à l'Union Européenne de résister aux pressions d'autres pays en faveur de l'accès au marché et contre les subventions à l'exportation. Das neue US‐Landwirtschaftsgesetz: Lehren aus einer absoluten ideologischen Kehrtwendung In den Vereinigten Staaten wurde vor kurzem eine neue Agrargesetzgebung verabschiedet, die im Vergleich zum FAIR‐Gesetz aus dem Jahre 1996 eine absolute ideologische Kehrtwendung darstellt. Diese Kehrtwendung steht im Widerspruch zu den Standpunkten, welche die US‐Regierung in Welthandelsfragen vertritt, insbesondere bei der WTO. Dieses Paradoxon kann mit Hilfe eines politökonomischen Ansatzes aufgelöst werden. Zu der Zeit, in der dieses Gesetz entstand, musste die Restriktion des US‐Staatshaushalts aus verschiedenen Gründen nicht strikt eingehalten werden. Dies ermöglichte den Anhängern verschiedener landwirtschaftlicher Interessenverbände, im Kongress eine Koalition zu Gunsten eines “großzügigen” Landwirtschaftsgesetzes zu bilden, welchem gerade in einem Wahljahr politisch nur wenig entgegen zu setzen war. Daher erweckt es den Anschein, dass im Hinblick auf die Wirtschaft die Preisinstabilität auf den internationalen Märkten das zentrale Anliegen des neuen Gesetzes ist, wobei den Auswirkungen auf die Handelspartner nur wenig Beachtung geschenkt wird. Aus diesem Grunde sinkt die Glaubwürdigkeit der US‐Regierung bei den WTO‐Verhandlungen hinsichtlich des Agrarhandels. Die breite Koalition, welche die Liberalisierung der Agrarpolitik in den OECD‐Ländern anstrebt, wird jedoch nicht wesentlich geschwächt. Daher dürfte es der Europäischen Union schwer fallen, dem Druck hinsichtlich der Zugeständnisse beim Marktzugang und der Abschaffung von Exportsubventionen standzuhalten.     

On the Welfare Cost of Economic Fluctuations in Developing Countries*

Macroeconomic fluctuations are much stronger in developing countries than in the United States. Yet, while a large literature debates the welfare cost of economic fluctuations in the United States, it remains an open question how large that cost is in developing countries. Using several models, we provide such a measure. We find that the welfare cost of consumption volatility per se is far from trivial and averages a substantial multiple of the corresponding U.S. estimate. Moreover, in many poor countries, the welfare gain from eliminating volatility may in fact exceed the welfare gain from an additional percentage point of growth forever.     

Nonlinear Thermodynamics and Social Science Modeling: Fad Cycles, Cultural Development and Identificational Slips

The paper argues that the application of nonlinear dynamics borrowed from thermodynamics for the study of the evolution of institutions amounts to an identificational slip. While the paper welcomes the importation of techniques from the natural sciences, thermodynamic feedback is simply an inappropriate technique for the study of evolutionary change. Thermodynamic feedback is only appropriate for the study of social dynamics like mob behavior, stock market gyrations, and fad cycles. One should rather appeal to the evolution of species-as recorded by change of gene frequency and phenotypic traits—as the appropriate metaphor for the study of evolution of culture—as manifested by change of rules and principles and their consequent order.     

Improving lattice schemes through bias reduction

Lattice schemes for option pricing, such as tree or grid/partial differential equation (p.d.e.) methods, are usually designed as a discrete version of an underlying continuous model of stock prices. The parameters of such schemes are chosen so that the discrete version “best” matches the continuous one. Only in the limit does the lattice option price model converge to the continuous one. Otherwise, a discretization bias remains. A simple modification of lattice schemes which reduces the discretization bias is proposed. The modification can, in theory, be applied to any lattice scheme. The main idea is to adjust the lattice parameters in such a way that the option price bias, not the stock price bias, is minimized. European options are used, for which the option price bias can be evaluated precisely, as a template to modify and improve American option methods. A numerical study is provided. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:733–757, 2006     

An example of multiple minima in a Cochrane-Orcutt procedure with multiple autocorrelation

We provide an example, based on an equation of the Canadian-US exchange rate, of multiple minima in a generalized Cochrane-Orcutt procedure. Our experiments suggest the need for search procedures in order to correctly identify autocorrelation structures.     

A computer assisted school bus routing strategy: A case study

The effect of routing changes on the efficiency of suburban-rural pupil transportation systems is demonstrated in a case study of a suburban-rural county in Virginia. A computer assisted routing method was used that included manual route design and computer aided route evaluation. Various policy options affecting routing were identified and new routes were developed. The recommended routes represented a 17% reduction in the number of routes required, a 19% reduction in the number of buses required, and a 57% reduction in the total number of vacant seats. While the computer assisted method used produced a more efficient routing structure, the process of manual route design was still slow and tedious. Techniques such as interactive computer graphics appear to be suited to the school bus routing problem and their use should be explored.     

Saving under uncertainty: A bivariate non-expected utility approach

We adopt the multivariate non-expected utility approach proposed by Yaari [1986] to provide a characterization of the comparative statics effects of greater risk aversion and of mean-preserving increases in risk on saving and borrowing in the presence of income and interest rate risk.We show that in Yaari's model, it is possible to extend the applicability of the Diamond and Stiglitz [1974] and Kihlstrom and Mirman [1974] (DSKM) single-crossing property to establish a relationship between greater risk aversion and saving (or borrowing) on the basis of the individual's ordinal preferences as long as the two risks are independent. We also demonstrate that the comparative statics effects of a joint mean-preserving increase in random income and interest rate on saving and borrowing can be determined by an extension of the DSKM single-crossing property.